In the subscription-based pricing model, customers regularly pay for a service or product. The price of the subscription is different from that of traditional products, since the price is often set according to the duration of the subscription, associating the subscriptions with a longer duration to more advantageous economic conditions.
What companies do wrong about subscription prices
Deciding how much to charge for your products or services is an activity to which most businesses do not devote sufficient attention. Recent studies estimate that companies spend on average only ten hours a year on pricing.
Many companies tend to look and adapt to the pricing strategies of the competition or trying to assume the correct price for each product, but it is crucial that the data are the basis of every pricing decision made.
Subscription model, 4 types of subscription pricing
Each of the four common price models for subscription companies is sized according to several factors. And everyone has optimal conditions to be applied.
1 .Fixed/flat-rate tariff model
The fixed price is the simplest strategy and immediately understandable: a single product, a fixed set of features and a fixed price per month.
The flat rate is the easiest to communicate and easiest to sell. But often choosing this model means giving up the maximization of revenues. Keeping prices down means losing additional revenue from larger companies; and vice versa, smaller companies may be attracted by cheaper tools.
2. Differentiated price model
Differentiated prices allow companies to offer multiple packages with different features and combinations of products available at different prices. The number of packages may vary, but most subscription companies offer two or three price levels. It is essential to keep in mind that offering too many choice options to be able to respond to the needs of different types of users generates indecision and a consequent drop in sales.
3. Model per unit/user
The price per user is the reference model for most subscription companies. Prices scale evenly with the number of users: the more users there are, the more you can charge. Prices per user are easily understood by potential buyers, simplifying the sales process. It also makes forecasting revenue simple, as revenue increases in direct proportion to the number of users. However, charging for each new user has disadvantages. It doesn’t reflect the real value your product provides: multiple workstations don’t necessarily make the product more valuable to users. The per-seat charge can also lead users to share logins between teams, reducing potential revenue.
4. Usage-based model
Usage-based pricing is somewhat less common among saas companies: it is mainly used by telecommunications companies and IT services. Users are charged based on the amount of a product or service they consume (as with telcos, for example, in proportion to the GB of data required). Tying prices to usage makes it easier for small businesses to start using a product. Usage-based charging, however, makes it much more difficult to predict revenue, as billing can vary greatly each month.
Subscription model, factors to consider when choosing a price model
Different situations require different pricing models. Among the specifications that help a company choose which to adopt:
- What are your fixed and variable costs?
- Who are your customers and why do they use your products or services?
- What price strategy do competitors adopt?
Even after choosing a subscription price model and a strategy to set prices, there is still room to improve your prices. Strategies such as freemium, upselling and cross-selling and multi-tiered packages can help increase average spending per user.